Next: Reform taxes

The cliff deal only complicated the tax code

January 06, 2013

Former U.S. President Ronald Reagan speaks at a rally for Senator Durenberger February 8, 1982. (Michael Evans)

"Over the course of this century, our tax system has been modified dozens of times and in hundreds of ways, yet most of those changes didn't improve the system. They made it more like Washington itself — complicated, unfair, cluttered with gobbledygook and loopholes designed for those with the power and influence to hire high-priced legal and tax advisers."

Ronald Reagan, May 28, 1985

In 1986, Congress passed and President Reagan signed a sweeping reform of the federal tax code to make it simpler and more rational. The measure abolished a horde of tax breaks, reduced the number of brackets and slashed rates. These changes were meant to reduce the time required to fill out a 1040 form while improving economic performance by diminishing the distortions caused by the tax code.

But here we are more than a quarter-century later, and things look much like they did before. What Reagan simplified soon became complicated again. The package agreed on by President Barack Obama and Congress to avert the fiscal cliff is no help.

In fact, it makes the whole tax system even more confusing. New limits on personal exemptions and various deductions among upper-income taxpayers add a labyrinth of complexity, piled on to such mysteries as the alternative minimum tax.

The measure also extended lots of business loopholes that were scheduled to expire. As The Los Angeles Times reported, lawmakers indulged the continuation of "special tax breaks for rum-makers, racetrack owners, railroads — and Hollywood studios." Just these preferences will cost more than $63 billion in lost revenue next year, according to the congressional Joint Committee on Taxation.

Not everyone is happy with the outcome. Sen. Tom Coburn, R-Okla., said he did his best to get rid of "tax goodies for special groups" but "lost every vote." House Speaker John Boehner admitted that without spending restraint and "a fairer, cleaner tax code, our debt will continue to grow, and our economy will continue to stumble."

Let's hope he's ready to push for change. Tax reform offers one of the few plausible ways to advance both Republican and Democratic goals on fiscal policy.

Obama, after all, accepted far less than he originally sought on the revenue side. He wanted to raise the marginal rate on households earning more than $250,000, but settled for hitting those at $400,000 and above – which yields far less revenue. Republicans, however, had to swallow that higher rate, which they had long vowed to prevent. Meanwhile, the federal debt will continue to mushroom.

Tax reform offers something for each side. Getting rid of deductions would broaden the tax base, allowing rates to be reduced — something Republicans would like. But even at lower rates, revenues could increase — something Democrats would like.

By minimizing the role of tax considerations in economic decisions, a simpler tax code would also boost economic efficiency and growth over the long term. Those, in turn, would further increase revenues, narrowing the budget deficit and potentially allowing additional rate cuts.

The great risk is that Obama will once again focus on revenue to the exclusion of making substantial reductions in the growth of federal spending. That can't happen. Second-term presidents tend to think about their legacy. If Obama leaves office having failed to deal with rampant spending — particularly entitlement spending — that will be his sorry legacy. The president must take a leading role on spending reform.

And if he does, he can fulfill his call for a simpler tax code. House Budget Committee Chairman Paul Ryan, R-Wis., has offered a plan to achieve it. In principle, it should be doable. Not easy, of course — every tax break has a constituency that will fight to keep it.

But it can be done. Reagan proved it. The need for tax reform is even greater today than it was then. In the deal that averted the fiscal cliff, our leaders managed only to avoid a disaster. It's time for them to aim higher.